Tuesday, May 29, 2007

Advanced Medical Optics (NYSE:EYE): Color on MoisturePlus recall

Couple of firms comment on Advanced Medical Optics (NYSE:EYE) after the co said late on Friday that it was recalling its Complete MoisturePlus contact lens solutions and called on consumers to stop using them after data showed a higher risk of eye infections. The announcement follows ANO's recall of the same product last year due to a bacterial contamination, and a recall by rival Bausch & Lomb Inc. (BOL) after its contact lens solution was linked to infections. The company did not give an outlook for the expected financial impact of recalling the product, one of its top selling items:

- Piper Jaffray estimates an annual run-rate of Complete MoisturePlus sales of $60 million worldwide, which they are pulling out of their model. This reduces 2007 revenue estimate by $35 million and 2008 by $60 million. Firm is reducing 2007 EPS by $0.12 and 2008 by $0.20 to $1.22 and $2.06, respectively. They are lowering EYE's price target from $41 to $37, based on the same 18x CY08 EPS estimate, which is now $2.06.

The collateral damage to AMO should be much more limited than in the case of Bausch's recall. AMO generates about 80% of its revenue from surgical products which are sold to ophthalmologists as opposed to the optometrists and consumers that purchase eye care products such as solutions, contact lenses, and pharmaceuticals over the counter. Nevertheless, AMO will have to devote substantially more resources to the division to the detriment of profit margins. Indirectly, the recall throws a wrench into the company's ability to make a bid for Bausch & Lomb by increasing AMO's financing costs.

- Citigroup notes that although the company has provided little detail on MoisturePlus sales, they estimate global sales were likely to have been on the order of $80m in 2007. With little cost flexibility, removing these sales trims Citi's 2007 forecast by $0.43 to $1.01 (which excludes any one-time costs associated with the recall). In 2008, they estimate a drop in sales of $66m resulting in a $0.37 EPS drop to $1.78 as they expect any share loss to persist in light of the difficulty Bausch & Lomb has had in regaining share after its recall of Renu with MoistureLoc. Maintains Sell and lowers tgt to $32 from $33.

Notablecalls: BOL took a 20% haircut after it announced the recall of Renu. I don't think the damage in EYE will be as bad because as Piper notes, most of EYE's revenue comes from surgical products. The financial impact of recalling MoisturePlus stands around $0.20-$0.40, suggesting 3-6 pts of downside. The stock traded around $37 in after hours action on Friday. Think I'd be bidding EYE opportunistically around the $34-$35 level but would be ready to pay more if it starts to look like the downside is going to be less than that. I think the bidding war surrounding BOL has put the entire sector in play and that may help the stock to bounce.